commonwealth bank of australia recent developments · as at march 31, 2018, deposits comprised 68%...
TRANSCRIPT
-1-
MELBOURNE:120402.7
May 16, 2018
Commonwealth Bank of Australia
Recent Developments
The information set forth below is not complete and should be read in conjunction with
the information contained on the “Supplementary business and financial disclosure” page of the
U.S. investor website of the Commonwealth Bank of Australia (“CBA” or the “Group”) at
http://www.commbank.com.au/usinvestors (the “U.S. Investor Website”). This “Recent
Developments” release supplements and, to the extent inconsistent with any information
previously included on the U.S. Investor Website, amends and supersedes such information.
This “Recent Developments” release contains certain forward-looking statements which
involve known and unknown risks and uncertainties. Such forward-looking statements, including
economic forecasts and assumptions and business and financial projections, involve known and
unknown risks, uncertainties and other factors that may cause the actual results, performance or
achievements of the Group to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. See “Special Note
Regarding Forward-Looking Statements” in the Group’s U.S. Half-Year Disclosure Document
for the half-year ended December 31, 2017 included on the U.S. Investor Website (the “2018 U.S.
Half-Year Disclosure Document”).
References to “$” are to Australian Dollars.
Trading Update for the Quarter Ended March 31, 2018
The unaudited net profit after tax (“statutory basis”) and unaudited net profit after tax
(“cash basis”) figures presented have been rounded to the nearest $50 million.
Unless otherwise noted, all financial results are presented on a “continuing operations”
basis, which excludes results from the Group’s life insurance businesses in Australia and New
Zealand (“discontinued operations”) that are in the process of being sold to AIA Group Limited
(the “Life Insurance Divestment”). For more details on the Life Insurance Divestment, refer to
the 2018 U.S. Half-Year Disclosure Document and the Commonwealth Bank of Australia Recent
Developments, dated October 4, 2017, each of which is available on the U.S. Investor Website.
In addition, unless otherwise noted, all comparisons are to the simple average of the
results from the quarter ended September 30, 2017 and the quarter ended December 31, 2017.
Accordingly, comparisons of the results for the quarter ended March 31, 2018 against the quarter
ended March 31, 2017 have not been presented in this Recent Developments release.
Summary
On May 9, 2018, the Group advised that its unaudited net profit after tax (“statutory
basis”) was $2.30 billion for the quarter ended March 31, 2018 (the “quarter”). Unaudited net
-2-
MELBOURNE:120402.7
profit after tax (“cash basis”)1 for the quarter was $2.35 billion. The Group’s Common Equity
Tier 1 (“CET1”) capital ratio was 10.1% calculated using the methodology accepted by the
Australian Prudential Regulatory Authority (“APRA”), the Group’s primary regulator, as at
March 31, 2018, an increase of 37 basis points since December 31, 2017 after allowing for the
impact of the 2018 interim dividend.
During the quarter, underlying2 operating income decreased by 4%, driven by two fewer
days in the quarter and lower other banking income. Excluding the impact of two fewer days in
the quarter (approximately $100 million), net interest income was broadly flat. Volume growth
was offset by a slight decline in Group Net Interest Margin compared to the six months ended
December 31, 2017, due to customers switching from interest only to principal and interest home
loans, as well as higher basis risk. The decrease in other banking income was driven by lower
treasury and trading performance, and seasonally lower card fee income. Underlying2 operating
expenses increased 3% in the quarter, driven by increased provisions for regulatory and
compliance project spend. Refer to Annex A for a reconciliation between reported and
underlying operating income and operating expense.
Loan Impairment Expense (“LIE”)3
of $261 million for the quarter equated to 14 basis
points of Gross Loans and Acceptances (“GLAA”), compared to 16 basis points for the six
months ended December 31, 2017. The Group continued to strengthen its balance sheet during
the quarter, with the Group increasing its long-term wholesale funding portfolio tenor to 5.1
years at period end.
Note: Operating performance is operating income less operating expenses. In order to present an underlying view of the Group’s results, the
impact of consolidated and equity accounted profits of AHL Holdings Pty Ltd (trading as Aussie Home Loans) has been excluded and results for the six months ended December 31, 2017 have been adjusted to exclude a $375 million expense provision which represents
what the Group believes to be a reliable estimate of the level of the civil penalty that the Federal Court of Australia may impose in
connection with the AUSTRAC Proceedings. The sources for the Home Lending, Household Deposits and Business Lending figures are the APRA Monthly Banking Statistics (Historical series) and Reserve Bank of Australia Financial Aggregates. Home Lending
includes CBA subsidiaries, Homepath P/L, Residential Mortgage Group P/L and Wallaby Trust. Business lending (excluding cash
management pooling facilities) represents drawn balances and includes specific “business lending” categories in the following lodged APRA returns: ARF 320.0 Statement of Financial Position Domestic Book, ARF 320.1 Debt Securities Held and ARF 320.4 Accepted
and Endorsed Bills, excluding sub-categories of Banks, Authorised Deposit-taking Institutions, Registered Financial Corporations and
Governments. “AUM” stands for Assets Under Management and “FUA” stands for Funds Under Administration. AUM and FUA figures are not annualized. Volume growth comparisons for AUM and FUA are compared to average AUM and FUA for the quarter
ended December 31, 2017.
Key outcomes for the quarter are summarized below.
-3-
MELBOURNE:120402.7
Credit Quality
Consumer arrears were seasonally higher in the quarter.
There was an increase in home loan arrears during the quarter, which was driven by a
small number of customers experiencing difficulties with rising essential costs and
limited income growth.
Troublesome and impaired assets increased to $6.6 billion during the quarter. A small
number of credits drove the increase in troublesome exposures over the quarter, while
impaired assets remained stable.
Total credit provisions were $3.8 billion as at March 31, 2018, broadly in line with total
credit provisions of $3.8 billion at December 31, 2017.
Note: Figures for the fiscal year ended June 30, 2009 in the “Loan impairment expense” chart above include Bankwest on a pro forma
basis and are based on LIE for that same year. Statutory LIE for the year ended June 30, 2010 was 48 basis points and statutory LIE for the year ended June 30, 2013 was 21 basis points. Consumer arrears includes retail portfolios of Retail Banking Services,
Business and Private Banking, Bankwest and New Zealand. Consumer arrears for home loans are also presented excluding the
Western Australia housing portfolio (Excl. WA).
-4-
MELBOURNE:120402.7
Balance Sheet
As at March 31, 2018, deposits comprised 68% of the Group’s funding and the average
tenor of the long-term wholesale funding portfolio was 5.1 years. The Group issued $10.2
billion of long term funding in the quarter.
As at March 31, 2018, the Net Stable Funding Ratio was 111%, up from 110% at
December 31, 2017.
The Liquidity Coverage Ratio increased to 133% as at March 31, 2018, driven by higher
liquid assets, which increased approximately $5 billion in the quarter to $144 billion (spot
balance as at March 31, 2018).
The Group’s Leverage Ratio, which is defined as Tier 1 Capital as a percentage of total
exposures, was 5.2% on an APRA basis as at March 31, 2018, a decrease of 20 basis
points compared to December 31, 2017, primarily reflecting the impact of the 2018
interim dividend. The Group’s Leverage Ratio as at March 31, 2018 was 5.9% on an
internationally comparable basis4.
-5-
MELBOURNE:120402.7
Capital
Note: IRRBB stands for interest rate risk in the banking book.
The Group’s CET1 ratio, calculated using the methodology accepted by APRA, was
10.1% as at March 31, 2018. After allowing for the impact of the 2018 interim dividend
(which included the issuance of shares in respect of the Group’s Dividend Reinvestment
Plan), the Group’s CET1 ratio increased 37 basis points in the quarter. This increase was
driven by capital generated from earnings, partially offset by higher Total Risk Weighted
Assets.
Credit Risk Weighted Assets (RWAs) were higher in the quarter, decreasing the Group’s
CET1 ratio by 18 basis points, reflecting a combination of volume and foreign exchange
movements, credit quality and regulatory changes.
The final tranche of outstanding Colonial debt ($315 million) is due to mature during the
quarter ended June 30, 2018 and the payment is expected to decrease the Group’s CET1
ratio by seven basis points.
The Group expects to adopt AASB 9 on July 1, 2018. The impact of this adoption will be
recognized in opening retained earnings. The Group’s estimate of the pro forma impact of
AASB 9 as at January 1, 2018 is an increase in collective provisions of approximately
$1,050 million (before tax) and a reduction in the CET1 ratio of approximately 26 basis
points. This reflects the revised treatment of the General Reserve for Credit Losses as
advised by APRA. For more details on the implementation of AASB 9, refer to Note 1.1
of the Group’s financial statements included in the 2018 U.S. Half-Year Disclosure
Document.
On May 1, 2018, APRA released the findings of its Prudential Inquiry into the Group.
APRA requires the Group to increase Operational Risk regulatory capital by $1 billion
(representing an increase of Total Risk Weighted Assets of $12.5 billion). This
adjustment became effective on April 30, 2018, which was the date the Group entered
-6-
MELBOURNE:120402.7
into the APRA Enforceable Undertaking (as defined below) with APRA which states that
the Group may apply for the removal of the adjustment only on meeting certain
conditions. The pro forma impact on the CET1 ratio of APRA’s decision as at March 31,
2018 is a decrease of 27 basis points to 9.8%. For more details on the Prudential Inquiry
and the APRA Enforceable Undertaking, refer to “CBA to Implement All
Recommendations of APRA’s Prudential Inquiry and Enters into APRA Enforceable
Undertaking” below and the 2018 U.S. Half-Year Disclosure Document.
The Life Insurance Divestment is expected to be completed in the six months ended
December 31, 2018 (subject to regulatory approvals) and is expected to increase the
Group’s CET1 ratio by approximately 70 basis points.
Basel III Pillar 3 Capital Adequacy and Risks Disclosures as at March 31, 2018
On May 9, 2018, the Group released its Basel III Pillar 3 Capital Adequacy and Risks
Disclosures as at March 31, 2018. That release is attached as Annex B hereto.
CBA to Implement All Recommendations of APRA’s Prudential Inquiry and Enters into
APRA Enforceable Undertaking
On May 1, 2018, the Group confirmed it will implement all of the recommendations
contained in the Report of the Prudential Inquiry released that day by APRA (the “APRA
Report”). An overview of those recommendations is set forth below, with the “APRA Levers of
Change” coming directly from the APRA Report.
In response to the APRA Report, CBA has also entered into an Enforceable Undertaking
with APRA (the “APRA Enforceable Undertaking”). The key terms of the APRA Enforceable
Undertaking include:
1. Remedial Action Plan
Establishing an APRA-agreed remedial action plan within 60 days with clear and
measurable responses to each of the APRA Report’s recommendations supported by a
timeline and executive accountabilities for completing each remedial action.
-7-
MELBOURNE:120402.7
Appointing an independent reviewer, approved by APRA, to report to APRA every
three months, commencing September 30, 2018, on compliance with the APRA
Enforceable Undertaking and on those items in the remedial action plan that CBA
considers are nearing completion.
2. Remuneration
Reporting to APRA by June 30, 2018 on how the findings of the APRA Report have
been reflected in remuneration outcomes for current and past executives.
Ensuring accountability for completing items in the remedial action plan is given
significant weight in the performance scorecards of the senior executive team and
other staff as relevant.
3. APRA Capital Adjustment
APRA will apply a capital adjustment to CBA’s minimum capital requirement by
adding $1 billion to CBA’s operational risk capital requirement (the “APRA Capital
Adjustment”). The effect of this adjustment equates to 27 basis points of CET1
capital and reduces CBA’s pro forma CET1 ratio as at March 31, 2018 from 10.1% to
9.8%. See Annex C for further details regarding the impact of the APRA Capital
Adjustment.
CBA may apply for removal of all or part of the APRA Capital Adjustment when it
believes it can demonstrate compliance, to APRA’s satisfaction, with the APRA
Enforceable Undertaking and commitments in the remedial action plan.
In early July, subject to finalization with APRA, CBA expects to provide a public update
on its agreed remediation plan. CBA expects to disclose an estimate of the expected financial
cost of this program for the 2019 financial year as part of its U.S. Annual Disclosure Document
for the year ended June 30, 2018. In addition, CBA expects to report on its progress in
addressing the recommendations of the APRA Report. The form of this public reporting is
subject to agreement with APRA.
Fitch Ratings Affirms CBA’s Ratings, Revises Outlook
On May 7, 2018 CBA noted that day’s announcement by Fitch Ratings (“Fitch”) on the
credit ratings of CBA. Fitch affirmed CBA’s long-term issuer default rating (“IDR”) at AA- and
revised its outlook of the same from stable to negative. CBA’s short-term rating of F1+ remained
unchanged.
The affirmation of CBA’s ratings reflects Fitch’s expectation that CBA will maintain its
franchise and financial profile despite the findings of the APRA Prudential Inquiry into CBA.
The long-term IDR outlook was revised to negative to reflect CBA’s risks in remediating
shortcomings in operational risk controls and governance. Fitch noted that the outlook may be
returned to stable if CBA can strengthen its risk framework and controls in line with regulatory
requirements and international best practices.
-8-
MELBOURNE:120402.7
The long-term IDR and outlook for CBA’s New Zealand subsidiary, ASB Bank Limited,
are aligned with those of CBA.
The credit ratings assigned to CBA by other ratings agencies remain unchanged. A credit
rating is not a recommendation to buy, sell or hold securities and may be subject to suspension,
reduction or withdrawal at any time by an assigning rating agency. Ratings should be evaluated
independently of any other information.
CBA and ASIC Agree In-Principle Settlement over BBSW
On Wednesday, May 9, 2018, CBA announced it has reached an in-principle agreement
with the Australian Securities and Investments Commission (“ASIC”) to settle the legal
proceedings (the “ASIC Legal Proceedings”) in relation to claims of manipulation by CBA of the
Bank Bill Swap Rate (“BBSW”). For more information on the ASIC Legal Proceedings, refer to
the 2018 U.S. Half-Year Disclosure Document.
As part of the in-principle settlement, CBA will acknowledge that, in the course of
trading on the BBSW market in Australia on five occasions between February and June 2012,
CBA attempted to engage in unconscionable conduct in breach of the Australian Securities and
Investments Commission Act 2001. CBA will also acknowledge that it did not have adequate
policies and systems in place to monitor the trading and communications of its staff in order to
prevent that conduct from occurring.
Subject to approval of the settlement by the Federal Court of Australia, CBA has agreed
to pay a $5 million penalty to ASIC, $15 million to a financial consumer protection fund and $5
million towards ASIC’s costs of the litigation and its investigation. The impact of this settlement
will be reflected in CBA’s results for the financial year ended June 30, 2018.
CBA has also agreed to enter into an enforceable undertaking with ASIC, under which an
independent expert will be appointed to review controls, policies, training and monitoring in
relation to its BBSW business.
CBA and ASIC will make an application to the Federal Court of Australia for approval of
the settlement.
Alan Docherty Appointed Acting Chief Financial Officer Following Resignation of Rob
Jesudason
On Monday, May 14, 2018, CBA announced the appointment of Alan Docherty as
Acting Chief Financial Officer with immediate effect following the resignation of Rob Jesudason.
Mr. Docherty had been the Chief Financial Officer Institutional Banking and Markets.
Since joining CBA in 2003, he has held senior finance roles in Group Finance, Group Treasury
and the Business and Private Bank. Previously, he worked in PwC’s Financial Services practice
in the United Kingdom, and with Arthur Andersen and Ernst & Young in Sydney.
-9-
MELBOURNE:120402.7
Endnotes
1. Except as expressly noted, this update is based on the Group’s net profit after tax (“cash basis”),
which is prepared on a different basis than Australian equivalents to International Financial
Reporting Standards (“IFRS”). Net profit after tax (“cash basis”) is used by management of the
Group to present a view of the Group’s underlying operating results, excluding items that
management believes introduce volatility and/or one-off distortions of the Group’s current period
performance. These items, such as hedging and IFRS volatility and gains or losses on disposal
and acquisition of entities net of transaction costs, are calculated consistently period on period
and do not discriminate between positive and negative adjustments. The difference between
unaudited net profit after tax (“statutory basis”) and unaudited net profit after tax (“cash basis”) in
the quarter was mainly driven by losses on foreign exchange hedges relating to future New
Zealand earnings.
2. In order to present an underlying view of the Group’s results, the impact of consolidation and
equity accounted profits of AHL Holdings Pty Ltd (trading as Aussie Home Loans) has been
excluded and results for the six months ended December 31, 2017 have been adjusted to exclude
a $375 million expense provision which represents what the Group believes to be a reliable
estimate of the level of the civil penalty that the Federal Court of Australia may impose in
connection with the proceedings filed by the Australian Transaction Reports and Analysis Centre
in the Federal Court of Australia on August 3, 2017 (the “AUSTRAC Proceedings”). For more
details on the AUSTRAC Proceedings, refer to the Commonwealth Bank of Australia Recent
Developments, dated April 3, 2018, the 2018 U.S. Half-Year Disclosure Document, the
Commonwealth Bank of Australia Recent Developments, dated December 27, 2017, the
Commonwealth Bank of Australia Recent Developments, dated November 22, 2017, and the
Group’s U.S. Annual Disclosure Document for the year ended June 30, 2017, each of which is
available on the U.S. Investor Website.
3. Loan impairment expense calculated as a percentage of average Gross Loans and Acceptances
(“GLAA”) and expressed in basis points.
4. “Internationally comparable basis” analysis aligns with the methodology set forth in the APRA
study entitled “International capital comparison study” (July 13, 2015).
Annex A
Reconciliation between Reported and Underlying Operating Income and Operating Expense
Note: Net profit after tax (“cash basis”) is presented both including and excluding the $375 million expense provision which represents what the Group believes to be a reliable estimate of the level of the civil penalty that the Federal Court of Australia may impose in
connection with the AUSTRAC Proceedings.
Annex B
Basel III Pillar 3 Capital Adequacy and Risks Disclosures as at March 31, 2018
Commonwealth Bank of Australia | ACN 123 123 124 | 9 May 2018
Basel III Pillar 3Capital Adequacy and Risks Disclosures as at 31 March 2018
This page has been intentionally left blank
Commonwealth Bank of Australia – Pillar 3 Report 1
Table of Contents
1 Introduction 2
2 Risk Weighted Assets 3
3 Credit Risk 4
3.1 Credit Risk Exposures 4
3.2 Past Due and Impaired Exposures, Provisions and Reserves 6
3.3 Securitisation 8
4 Leverage Ratio 9
5 Glossary 10
For further information contact:
Investor Relations
Melanie Kirk
Phone: 02 9118 7113
Email: [email protected]
Introduction
2 Commonwealth Bank of Australia – Pillar 3 Report
1. Introduction
The Commonwealth Bank of Australia (the Group) is an
Authorised Deposit-taking Institution (ADI) regulated by the
Australian Prudential Regulation Authority (APRA) under the
authority of the Banking Act 1959.
This document is prepared in accordance with Board
approved policy and quarterly reporting requirements set out
in APRA’s prudential standard APS 330 “Public Disclosure”. It
presents information on the Group’s capital adequacy and
Risk Weighted Asset (RWA) calculations for credit risk
including securitisation, Market Risk, Interest Rate Risk in the
Banking Book (IRRBB) and Operational Risk.
This document also presents information on the Group’s
leverage ratio in accordance with prescribed methodology.
The Group is required to report its assessment of capital
adequacy on a Level 2 basis. Level 2 is defined as the
consolidated banking group excluding insurance and funds
management businesses and entities through which
securitisation of Group assets is conducted.
The Group is predominantly accredited to use the Advanced
Internal Ratings Based approach (AIRB) for credit risk and
Advanced Measurement Approach (AMA) for operational risk.
The Group is also required to assess its traded market risk
and IRRBB requirement under Pillar 1 of the Basel capital
framework.
This document is unaudited, however, it has been prepared
consistent with information that has been subject to review by
an external auditor and published elsewhere or has been
supplied to APRA.
The Group’s capital adequacy and risk disclosures for the
year ended 30 June 2017 are available on the Group’s
corporate website:
www.commbank.com.au/about-us/investors/shareholders.
Group Capital Ratios
The Group’s Basel III Common Equity Tier 1 (CET1) APRA
ratio was 10.1% at 31 March 2018, compared to 10.4% at
31 December 2017.
After allowing for the impact of the 2018 interim dividend
(which included the issuance of shares in respect of the
Dividend Reinvestment Plan (DRP)), the CET1 (APRA) ratio
increased 37 basis points in the quarter. This was primarily
driven by capital generated from earnings, partly offset by
higher risk weighted assets (RWA).
The Group’s Basel III internationally comparable CET1 ratio
as at 31 March 2018 was 15.7%, compared to 16.3% at
31 December 2017. The internationally comparable basis
aligns with the APRA study entitled “International capital
comparison study” (13 July 2015).
Capital Initiatives
The following significant capital initiatives were undertaken
during the quarter:
Common Equity Tier 1 Capital
The DRP in respect of the 2018 interim dividend was
satisfied by the allocation of approximately $536 million
of ordinary shares, representing a participation rate of
15.3%.
Tier 2 Capital
In January 2018, the Group issued a USD1.25 billion
subordinated note that is Basel III compliant Tier 2
capital.
Subsequent to the period end, in April 2018, the Bank issued
$1.365 billion of CommBank PERLS X Capital Notes (PERLS
X), a Basel III compliant Additional Tier 1 security. This will
add approximately 30 basis points in Additional Tier 1 capital,
over and above the 31 March 2018 reported level.
Leverage Ratio
The Group’s Leverage Ratio, which is defined as Tier 1
Capital as a percentage of exposures, was 5.2% at
31 March 2018 (31 December 2017: 5.4%) on an APRA basis
and 5.9% (31 December 2017: 6.1%) on an internationally
comparable basis.
APRA’s Prudential Inquiry
On 1 May 2018, APRA released the findings of the Prudential
Inquiry into CBA. APRA requires CBA to increase
Operational Risk regulatory capital by $1 billion (RWA of
$12.5 billion). This adjustment is effective 30 April 2018,
being the date the Group entered into an Enforceable
Undertaking with APRA which states that CBA may apply for
the removal of the adjustment only on meeting certain
conditions. The pro-forma impact on the CET1 ratio as at
31 March 2018 is a decrease of 27 basis points, to 9.8%.
31 Mar 18 31 Dec 17
Summary Group Capital Adequacy Ratios (Level 2) % %
Common Equity Tier 1 10. 1 10. 4
Tier 1 12. 0 12. 4
Tier 2 2. 8 2. 4
Total Capital (APRA) 14. 8 14. 8
Common Equity Tier 1 (Internationally Comparable) (1) 15. 7 16. 3
(1) Analysis aligns with the APRA study entitled “International capital comparison study” (13 July 2015).
Risk Weighted Assets
Commonwealth Bank of Australia – Pillar 3 Report 3
2. Risk Weighted Assets
Risk weighted assets are calculated using the AIRB approach
for the majority of the Group’s credit risk exposures.
Internal assessment and supervisory formula approaches are
used where relevant for non-rated securitisation exposures
and for rated exposures where APS 120 “Securitisation”
prohibits the Group using the ratings-based approach. The
ratings-based approach is used for securitisation exposures
rated by External Credit Assessment Institutions (ECAI)
where APS 120 allows or requires.
APS 330 Table 3a to 3e – Basel III capital requirements (RWA)
31 Mar 18 31 Dec 17
Asset Category $M $M $M %
Credit Risk
Subject to AIRB approach (1)
Corporate 69,209 69,252 (43) (0. 1)
SME corporate 34,606 33,521 1,085 3. 2
SME retail 4,620 4,675 (55) (1. 2)
SME retail secured by residential mortgage 2,523 2,534 (11) (0. 4)
Sovereign 2,264 2,186 78 3. 6
Bank 11,672 10,780 892 8. 3
Residential mortgage 137,603 136,047 1,556 1. 1
Qualifying revolving retail 9,786 8,524 1,262 14. 8
Other retail 15,763 15,413 350 2. 3
Total RWA subject to AIRB approach 288,046 282,932 5,114 1. 8
Specialised lending 56,504 56,183 321 0. 6
Subject to standardised approach
Corporate 1,481 1,250 231 18. 5
SME corporate 299 279 20 7. 2
SME retail 5,799 5,701 98 1. 7
Sovereign 211 189 22 11. 6
Bank 64 63 1 1. 6
Residential mortgage 5,541 5,404 137 2. 5
Other retail 1,533 2,717 (1,184) (43. 6)
Other assets 6,719 5,323 1,396 26. 2
Total RWA subject to standardised approach 21,647 20,926 721 3. 4
Securitisation 2,937 1,622 1,315 81. 1
Credit valuation adjustment 4,736 4,498 238 5. 3
Central counterparties 975 824 151 18. 3
Total RWA for credit risk exposures 374,845 366,985 7,860 2. 1
Traded market risk 6,584 4,829 1,755 36. 3
Interest rate risk in the banking book 25,312 27,944 (2,632) (9. 4)
Operational risk 41,138 41,078 60 0. 1
Total risk weighted assets 447,879 440,836 7,043 1. 6
March 2018 quarter
Change in RWA forRisk Weighted Assets
(1) Pursuant to APRA requirements, RWA amounts derived from AIRB risk weight functions have been multiplied by a scaling factor of 1.06.
Risk Weighted Assets
Total RWA increased by $7.0 billion or 1.6% on the prior
quarter to $447.9 billion.
Credit Risk RWA
Credit Risk RWA increased $7.9 billion or 2.1% on the prior
quarter to $374.8 billion, mainly due to:
Higher residential mortgages, liquid assets as well as
trades settling across the quarter end;
Foreign currency movements;
Deterioration in credit quality across some consumer
retail portfolios and a small number of large corporate
exposures;
Implementation in January 2018 of revised APRA
Securitisation Standard APS 120; and
Refresh of credit risk estimates across some portfolios.
Traded Market Risk RWA
Traded Market Risk RWA inscreased by $1.8 billion or 36.3%.
This was driven by the conservative treatment, under the
internal model approach, of some interest rate exposures.
Interest Rate Risk in the Banking Book (IRRBB) RWA
IRRBB RWA decreased by $2.6 billion or 9.4%. This was due
to an increase in embedded gains as a result of higher
domestic short-term and offshore interest rates.
Operational Risk RWA
Operational Risk RWA have remained largely unchanged
from the prior quarter.
On 1 May 2018, APRA released the findings of the Prudential
Inquiry into CBA. APRA requires CBA to increase
Operational Risk regulatory capital by $1 billion (RWA of
$12.5 billion). This adjustment is effective 30 April 2018,
being the date the Group entered into an Enforceable
Undertaking with APRA which states that CBA may apply for
the removal of the adjustment only on meeting certain
conditions. The pro-forma impact on the CET1 ratio as at
31 March 2018 is a decrease of 27 basis points, to 9.8%.
Credit Risk
4 Commonwealth Bank of Australia – Pillar 3 Report
3. Credit Risk
3.1 Credit Risk Exposures
The following tables detail credit risk exposures subject to AIRB and Standardised approaches.
APS 330 Table 4a – Credit risk exposures by portfolio type and modelling approach
Average
On Non- exposure Change in exposure
balance market Market for March for March
sheet related related Total 2018 quarter (1)
2018 quarter (2)
Portfolio Type $M $M $M $M $M $M %
Subject to AIRB approach
Corporate 72,349 44,447 7,836 124,632 125,221 (1,178) (0. 9)
SME corporate 47,651 9,646 768 58,065 57,275 1,579 2. 8
SME retail 6,980 3,155 - 10,135 10,151 (32) (0. 3)
SME retail secured by residential mortgage 4,158 1,428 - 5,586 5,612 (52) (0. 9)
Sovereign 85,864 1,278 2,092 89,234 89,395 (322) (0. 4)
Bank 31,508 1,339 9,842 42,689 40,627 4,124 10. 7
Residential mortgage 483,638 72,251 - 555,889 553,717 4,344 0. 8
Qualifying revolving retail 11,044 18,318 - 29,362 28,058 2,609 9. 8
Other retail 8,329 3,170 - 11,499 11,417 165 1. 5
Total AIRB approach 751,521 155,032 20,538 927,091 921,473 11,237 1. 2
Specialised lending 52,712 10,483 629 63,824 64,015 (384) (0. 6)
Subject to standardised approach
Corporate 1,077 402 73 1,552 1,419 267 20. 8
SME corporate 189 87 21 297 288 19 6. 8
SME retail 4,801 952 30 5,783 5,735 95 1. 7
Sovereign 444 18 - 462 431 62 15. 5
Bank 201 - - 201 214 (25) (11. 1)
Residential mortgage 11,200 1,725 - 12,925 12,769 311 2. 5
Other retail 1,441 91 - 1,532 2,120 (1,175) (43. 4)
Other assets 12,478 - - 12,478 11,879 1,198 10. 6
Central counterparties - - 6,856 6,856 6,199 1,313 23. 7
Total standardised approach 31,831 3,275 6,980 42,086 41,054 2,065 5. 2
Total credit exposures (3) 836,064 168,790 28,147 1,033,001 1,026,542 12,918 1. 3
Off balance sheet
31 March 2018
(1) The simple average of exposures as at 31 March 2018 and 31 December 2017.
(2) The difference between exposures as at 31 March 2018 and 31 December 2017.
(3) Total credit risk exposures, calculated as Exposure at Default (EAD), do not include equities or securitisation exposures.
Credit Risk
Commonwealth Bank of Australia – Pillar 3 Report 5
Credit Risk Exposures (continued)
APS 330 Table 4a – Credit risk exposures by portfolio type and modelling approach (continued)
Average
On Non- exposure
balance market Market for December for December
sheet related related Total 2017 quarter (1)
2017 quarter (2)
Portfolio Type $M $M $M $M $M $M %
Subject to AIRB approach
Corporate 72,772 46,163 6,875 125,810 127,411 (3,202) (2. 5)
SME corporate 46,337 9,551 598 56,486 55,913 1,146 2. 1
SME retail 6,992 3,175 - 10,167 10,182 (30) (0. 3)
SME retail secured by residential mortgage 4,188 1,450 - 5,638 5,696 (116) (2. 0)
Sovereign 86,734 1,245 1,577 89,556 86,632 5,847 7. 0
Bank 28,996 1,456 8,113 38,565 40,718 (4,306) (10. 0)
Residential mortgage 478,121 73,424 - 551,545 550,280 2,529 0. 5
Qualifying revolving retail 9,887 16,866 - 26,753 26,809 (111) (0. 4)
Other retail 8,260 3,074 - 11,334 11,098 473 4. 4
Total AIRB approach 742,287 156,404 17,163 915,854 914,739 2,230 0. 2
Specialised lending 52,955 10,574 679 64,208 64,366 (315) (0. 5)
Subject to standardised approach
Corporate 918 365 2 1,285 1,173 224 21. 1
SME corporate 196 80 2 278 323 (89) (24. 3)
SME retail 4,687 951 50 5,688 5,822 (269) (4. 5)
Sovereign 400 - - 400 446 (92) (18. 7)
Bank 225 1 - 226 287 (121) (34. 9)
Residential mortgage 10,865 1,749 - 12,614 12,334 559 4. 6
Other retail 2,618 89 - 2,707 2,799 (183) (6. 3)
Other assets 11,280 - - 11,280 10,528 1,504 15. 4
Central counterparties - - 5,543 5,543 5,577 (69) (1. 2)
Total standardised approach 31,189 3,235 5,597 40,021 39,289 1,464 3. 8
Total credit exposures (3) 826,431 170,213 23,439 1,020,083 1,018,394 3,379 0. 3
Change in exposure
31 December 2017
Off balance sheet
(1) The simple average of exposures as at 31 December 2017 and 30 September 2017.
(2) The difference between exposures as at 31 December 2017 and 30 September 2017.
(3) Total credit risk exposures (calculated as EAD) do not include equities or securitisation exposures.
Credit Risk
6 Commonwealth Bank of Australia – Pillar 3 Report
3.2 Past Due and Impaired Exposures, Provisions and Reserves
All provisions for impairment assessed on an individual basis in accordance with the Australian Accounting Standards are
classified as specific provisions in accordance with APS 220 “Credit Quality”. Most of the collective provisions raised under the
Australian Accounting Standards are included in the General Reserve for Credit Losses (GRCL), however, certain collective
provisions not eligible for inclusion in the GRCL are classified as specific provisions. This includes, for example, collective
provisions on unsecured retail products 90 days or more past due.
Reconciliation of Australian Accounting Standards, APS 220 based credit provisions and APS 330 Table
4c – General reserve for credit losses
General
reserve for Specific Total
credit losses (1)
provision (1)
provisions
$M $M $M
Collective provision (2) 2,549 270 2,819
Individual provisions (2) - 972 972
Total provisions 2,549 1,242 3,791
Additional GRCL requirement (3) 585 - 585
Total regulatory provisions 3,134 1,242 4,376
31 March 2018
(1) Provisions classified according to APS 220 “Credit Quality”.
(2) Provisions according to the Australian Accounting Standards.
(3) The Group has recognised a deduction from CET1 of $585 million in order to maintain the required minimum GRCL.
31 December 2017
General
reserve for Specific Total
credit losses (1)
provision (1)
provisions
$M $M $M
Collective provision (2) 2,525 247 2,772
Individual provisions (2) - 978 978
Total provisions 2,525 1,225 3,750
Additional GRCL requirement (3) 554 - 554
Total regulatory provisions 3,079 1,225 4,304
(1) Provisions classified according to APS 220 “Credit Quality”.
(2) Provisions according to the Australian Accounting Standards.
(3) The Group has recognised a deduction from CET1 of $554 million in order to maintain the required minimum GRCL.
Credit Risk
Commonwealth Bank of Australia – Pillar 3 Report 7
Past Due and Impaired Exposures, Provisions and Reserves (continued)
The following tables provide a summary of the Group’s financial losses by portfolio type.
APS 330 Table 4b – Impaired, past due, specific provisions and write-offs charged by portfolio
Past due Specific Net charges
Impaired loans provision for individual Actual
assets ≥ 90 days balance (1)
provisions losses (2)
Portfolio $M $M $M $M $M
Corporate including SME, specialised lending and central
counterparties 1,749 430 708 40 77
Sovereign - - - - -
Bank 9 - 9 - -
Residential mortgage 1,308 2,544 350 20 30
Qualifying revolving retail 127 - 62 - 56
Other retail 165 27 113 - 100
Total 3,358 3,001 1,242 60 263
Quarter ended
As at 31 March 2018 31 March 2018
(1) Specific provision balance includes certain Australian Accounting Standards collective provisions on some past due loans ≥ 90 days.
(2) Actual losses equal write-offs from individual provisions, write-offs direct from collective provisions less recoveries of amounts previously written off, for the quarter ended 31 March 2018.
Past due Specific Net charges
Impaired loans provision for individual Actual
assets ≥ 90 days balance (1)
provisions losses (2)
Portfolio $M $M $M $M $M
Corporate including SME, specialised lending and central
counterparties 1,847 388 718 170 140
Sovereign - - - - -
Bank 9 - 9 - -
Residential mortgage 1,243 2,249 344 18 26
Qualifying revolving retail 116 - 55 - 61
Other retail 152 23 99 - 98
Total 3,367 2,660 1,225 188 325
As at 31 December 2017
Quarter ended
31 December 2017
(1) Specific provision balance includes certain Australian Accounting Standards collective provisions on some past due loans ≥ 90 days.
(2) Actual losses equal write-offs from individual provisions, write-offs direct from collective provisions less recoveries of amounts previously written off, for the quarter ended 31 December 2017.
Credit Risk
8 Commonwealth Bank of Australia – Pillar 3 Report
3.3 Securitisation
APS 330 Table 5a – Total securitisation activity for the reporting period
Total exposures Recognised gain or loss
securitised on sale
Underlying Asset Type $M $M
Residential mortgage 247 -
Credit cards and other personal loans - -
Auto and equipment finance - -
Commercial loans - -
Other - -
Total 247 -
For the 3 months to 31 March 2018
Total exposures Recognised gain or loss
securitised on sale
Underlying Asset Type $M $M
Residential mortgage 3,093 -
Credit cards and other personal loans - -
Auto and equipment finance 254 -
Commercial loans 491 -
Other - -
Total 3,838 -
For the 3 months to 31 December 2017
APS 330 Table 5b – Summary of total securitisation exposures retained or purchased
Total
On Balance Sheet Off Balance Sheet exposures
Securitisation Facility Type $M $M $M
Liquidity support facilities - 226 226
Warehouse facilities 4,355 2,537 6,892
Derivative facilities 97 24 121
Holdings of securities 7,640 - 7,640
Other - - -
Total securitisation exposures 12,092 2,787 14,879
As at 31 March 2018
Total
On Balance Sheet Off Balance Sheet exposures
Securitisation Facility Type $M $M $M
Liquidity support facilities - 205 205
Warehouse facilities 3,519 2,206 5,725
Derivative facilities 119 22 141
Holdings of securities 8,013 - 8,013
Other - - -
Total securitisation exposures 11,651 2,433 14,084
As at 31 December 2017
Leverage Ratio
Commonwealth Bank of Australia – Pillar 3 Report 9
4. Leverage Ratio
The Group’s Leverage Ratio, defined as Tier 1 Capital as a percentage of total exposures, was 5.2% at 31 March 2018 on an
APRA basis and 5.9% on an internationally comparable basis.
In December 2017, as part of the final calibration of the leverage ratio, the BCBS announced:
Confirmation that the leverage ratio will have minimum regulatory requirement of 3%, effective from 1 January 2018; and
Changes in the definition of exposures related to derivatives and off balance sheet items, effective from 1 January 2022.
In February 2018, APRA released additional refinements to the BCBS guidance including a minimum leverage ratio requirement
of 4%. These changes are subject to consultation and are proposed to apply from 1 July 2019.
Summary Group Leverage Ratio 31 Mar 18 31 Dec 17 30 Sep 17 30 Jun 17
Tier 1 Capital ($M) 53,750 54,465 52,592 52,684
Total Exposures ($M) (1) 1,032,125 1,012,503 1,011,801 1,027,958
Leverage Ratio (APRA) (%) 5. 2 5. 4 5. 2 5. 1
Leverage Ratio (Internationally Comparable) (%) (2) 5. 9 6. 1 5. 9 5. 8
(1) Total exposures is the sum of on Balance Sheet exposures, derivatives, Securities Financing Transactions (SFTs), and off Balance Sheet exposures, netof any Tier 1 regulatory deductions, as outlined in APS 110 “Capital Adequacy”.
(2) The Tier 1 Capital included in the calculation of the internationally comparable leverage ratio aligns with the 13 July 2015 APRA study titled “Internationalcapital comparison study” and includes Basel III non-compliant Tier 1 instruments that are currently subject to transitional rules.
Glossary
10 Commonwealth Bank of Australia – Pillar 3 Report
Term Definition
Additional Tier 1 Capital Additional Tier 1 Capital is a Basel III defined concept and consists of high quality capital that essentially
includes providing a permanent and unrestricted commitment of funds, is freely available to absorb
losses, ranks behind the claims of depositors and other more senior creditors in the event of a wind-up,
and provides for fully discretionary capital distributions.
Australian Accounting
Standards
The Australian Accounting Standards as issued by the Australian Accounting Standards Board.
Authorised Deposit-taking
Institution (ADI)
Includes banks, building societies and credit unions which are authorised by APRA to take deposits from
customers.
Advanced Internal Ratings
Based (AIRB) Approach
Used to measure credit risk in accordance with the Group’s Basel III accreditation that allows the Group
to use internal estimates of PD, LGD and EAD for the purposes of calculating regulatory capital.
Advanced Measurement
Approach (AMA)
Used to measure operational risk in accordance with the Group’s Basel III accreditation that allows the
Group to use its own internal model for the purposes of calculating regulatory capital.
Australian Prudential
Regulation Authority (APRA)
The regulator of banks, insurance companies and superannuation funds, credit unions, building societies
and friendly societies in Australia.
ADI Prudential Standards
(APS)
APRA’s ADI Prudential Standards. For more information, refer to the APRA web site.
ASB ASB Bank Limited – a subsidiary of the Commonwealth Bank of Australia that is directly regulated by the
Reserve Bank of New Zealand.
Bank Basel asset class – includes claims on ADIs and overseas banks.
Basel II Refers to the Basel Committee on Banking Supervision’s Revised Framework for International
Convergence of Capital Measurement and Capital Standards issued in June 2006 and as subsequently
amended.
Basel III Refers to the Basel Committee on Banking Supervision’s framework for more resilient banks and
banking systems issued December 2010 (revised June 2011) and Capital requirements for bank
exposures to central counterparties (July 2012).
CBA Commonwealth Bank of Australia – the head entity of the Group.
Central counterparty (CCP) A clearing house that interposes itself between counterparties to contracts traded in one or more
financial markets, thereby ensuring the future performance of open contracts.
Common Equity Tier 1
(CET1) Capital
The highest quality of capital available to the Group reflecting the permanent and unrestricted
commitment of funds that are freely available to absorb losses. It comprises ordinary share capital,
retained earnings and reserves less prescribed deductions.
Collective Provision All loans and receivables that do not have an individually assessed provision are assessed collectively
for impairment. The collective provision is maintained to reduce the carrying value of the portfolio of
loans to their estimated recoverable amounts. These provisions are as reported in the Group’s Financial
Statements in accordance with the Australian Accounting Standards (AASB 139 “Financial Instruments:
Recognition and Measurement”).
Corporate Basel asset class – includes commercial credit risk where annual revenues exceed $50 million.
Credit Valuation Adjustment
(CVA) Risk
The risk of mark-to-market losses related to deterioration in the credit quality of a derivative
counterparty.
Glossary
Commonwealth Bank of Australia – Pillar 3 Report 11
Term Definition
Exposure at Default (EAD) The extent to which a bank may be exposed upon default of an obligor.
External Credit Assessment
Institution (ECAI)
For example; Moody’s Investor Services, S&P Global Ratings or Fitch Ratings.
Extended Licensed Entity
(ELE)
APRA may deem an entity of an ADI to be part of the ADI itself for the purposes of measuring the ADI’s
exposures to related entities.
General Reserve for Credit
Losses (GRCL)
APS 220 requires the Group to establish a reserve that covers credit losses prudently estimated, but not
certain to arise, over the full life of all individual facilities making up the business of the ADI. Most of the
Group’s collective provisions are included in the General Reserve for Credit Losses. An excess of
required General Reserve for Credit Losses over the Group’s collective provisions is recognised as a
deduction from CET1.
Impaired Assets Facilities are classified as impaired where there is doubt as to whether the full amounts due, including
interest and other payments due, will be achieved in a timely manner.
Individual Provisions Provisions made against individual facilities in the credit-rated managed segment where there is
objective evidence of impairment and full recovery of principal and interest is considered doubtful. These
provisions are as reported in the Group’s Financial Statements in accordance with the Australian
Accounting Standards (AASB 139 “Financial Instruments: Recognition and Measurement”). Also known
as individually assessed provisions or IAP.
Interest Rate Risk in the
Banking Book (IRRBB)
The risk that the Bank’s profit derived from Net Interest Income (interest earned less interest paid), in
current and future periods, is adversely impacted from changes in interest rates. This is measured from
two perspectives; firstly by quantifying the change in the net present value of the Balance Sheet’s future
earnings potential and secondly, as the anticipated change to the Net Interest Income earned over 12
months. The APS117 IRRBB regulatory capital requirement is calculated using the net present value
approach.
Level 1 Represents the ADI and each entity of the ADI that has been approved as an extended licenced entity
by APRA.
Level 2 The level at which the Group reports its capital adequacy to APRA being the consolidated banking group
comprising the ADI and all of its subsidiary entities other than the insurance and funds management
entities and entities through which securitisation of Group assets is conducted. This is the basis on
which this report has been produced.
Level 3 The conglomerate group including the Group’s insurance and wealth management business.
Leverage Ratio Tier 1 Capital divided by Total Exposures, with this ratio expressed as a percentage.
Loss Given Default (LGD) The fraction of EAD that is not expected to be recovered following default.
Other Assets Basel asset class – primarily includes Cash, Investments in Related Entities, Fixed Assets and Margin
Lending.
Other Retail Basel asset class – primarily includes retail credit exposures not otherwise classed as a residential
mortgage, SME retail or a qualifying revolving retail asset.
Past due Facilities are past due when a contracted amount, including principal or interest, has not been met when
due or it is otherwise outside contracted arrangements.
Probability of Default (PD) The likelihood that a debtor fails to meet an obligation or contractual commitment.
Qualifying Revolving Retail
(QRR)
Basel asset class – represents revolving exposures to individuals less than $0.1m, unsecured and
unconditionally cancellable by the Group. Only Australian retail credit cards qualify for this AIRB asset
class.
Residential Mortgage Basel asset class – retail exposures secured by residential mortgage property.
Glossary
12 Commonwealth Bank of Australia – Pillar 3 Report
Term Definition
RBA Reserve Bank of Australia.
RBNZ Reserve Bank of New Zealand.
Risk Weighted Assets (RWA) The value of the Group’s On and Off Balance Sheet assets adjusted by risk weights calculated
according to various APRA prudential standards. For more information, refer to the APRA web site.
Scaling Factor In order to broadly maintain the aggregate level of capital in the global financial system post
implementation of Basel II, the Basel Committee on Banking Supervision applies a scaling factor to the
risk weighted asset amounts for credit risk under the IRB approach of 1.06.
Securitisation Basel asset class – Group-originated securitised exposures and the provision of facilities to customers in
relation to securitisation activities.
SME Corporate Basel asset class – Small and Medium Enterprise (SME) commercial credit risk where annual revenues
are less than $50 million and exposures are greater than $1 million.
SME Retail Basel asset class – Small and Medium Enterprise (SME) exposures up to $1 million that are not secured
by residential mortgage property.
SME Retail Secured by
Residential Mortgage
Small and Medium Enterprise (SME) exposures up to $1 million that are partly or fully secured by
residential mortgage property.
Sovereign Basel asset class – primarily includes claims on Australian and foreign governments, central banks
(including Reserve Bank of Australia), international banking agencies and regional development banks.
Specialised Lending Basel asset classes subject to the supervisory slotting approach and which include Income Producing
Real Estate (IPRE), object finance, project finance and commodity finance.
Specific Provisions APS 220 requires ADIs to report as specific provisions all provisions for impairment assessed by an ADI
on an individual basis in accordance with the Australian Accounting Standards and that portion of
provisions assessed on a collective basis which are deemed ineligible to be included in the General
Reserve for Credit Losses (which are primarily collective provisions on some defaulted assets).
Stressed VaR Stressed Value at Risk uses the same methodology as Value at Risk (VaR) except that the historical
data used is taken from a one year observation period of significant market volatility as seen during the
Global Financial Crisis.
Tier 1 Capital Comprises CET1 and Additional Tier 1 Capital.
Tier 2 Capital Capital items that fall short of the necessary conditions to qualify as Tier 1 Capital.
Total Exposures (as used in
the Leverage Ratio)
The sum of On Balance Sheet items, derivatives, securities financing transactions (SFTs), and Off
Balance Sheet items, net of any Tier 1 regulatory deductions that are already included in these items, as
outlined in APS 110 “Capital Adequacy” (APS 110) Attachment D.
Annex C
Impact of APRA Capital Adjustment on CET1 Ratio
1. Risk weighted asset assets impact is the Operational Risk Regulatory Capital impact multiplied by 12.5 in accordance with APRA
Prudential Standard APS110. 2. Operational Risk RWA as provided in the Basel III Pillar 3 Capital Adequacy and Risks Disclosures as at December 31, 2018, which
is available on the U.S. Investor Website.